Link to FCA Market Watch 69

While these observations are beneficial, enabling firms to benchmark themselves against others and correct any shortcomings, it leaves open the question of what good really should look like.

While that is relative and depends on size and complexity of the firm and its business model – which the FCA clearly emphasises – in our experience there are still several practical approaches that would benefit any market surveillance function. We highlight the main ones below.

1. Market abuse risk assessments

Market abuse risk assessments (MARA) have significantly increased in popularity. But ensuring they are scaled commensurate to the risk of the business remains a challenge for some. To ensure a robust approach to setting up a MARA we have three recommendations:

1. 1. Ensure a thorough list of Market Abuse behaviours. A good starting point for market abuse behaviours is the Market Abuse Regulation (MAR). But firms may choose to augment this with other sources where they operate or deal with clients outside the EU. For example, FINRA or OSFI contain additional behaviours for the US and Canada. Furthermore, various industry codes should be leveraged to identify product specific patterns. Finally, we don’t suggest firms cut down their list to what they believe is applicable from the start, but instead include all relevant patterns identified and clearly state in their MARA why such a pattern may not be applicable in certain instances, to evidence that appropriate consideration has been given to the granularity of market abuse patterns.
   2. Ensure a complete view of your business activities. A delicate balance is needed between mirroring the business view of trading activity – which is desk-based, versus that of the surveillance function – which is product-based. A pure desk-based view will mean plenty of duplication and repetition in the MARA, while a pure product-based view will be hard for the desk heads to recognise and review. This tends to be particularly an issue for where products are traded and used for hedging – such as futures –  and splitting there out is usually a good first step.
   3. Ensure execution methods are included. It is important that the MARA include this additional layer over the business activities. A consideration of what type of venue is executed on (e.g: Central-limit-order-book (CLOB / RFQ-based venue / OTC) or advisory / execution only for asset management will suffice.

2. Order and trade surveillance

The FCA highlights a particular concern around firms not monitoring all orders and trades. There are two common causes for this that we see. The first is that trade surveillance function often isn’t part of the New Business Process. Secondly, there often isn’t a complete up-to-date mapping of order and trade flow from execution to surveillance. Such a map can easily highlight missing links and help ensure a complete view for Market Abuse monitoring.

3. Front office

The FCA clearly sets out potential conflicts of interest and potential areas for concern where surveillance responsibilities overlap and/or are not clearly delineated between front office and compliance. Surveillance works best when the different parts of the organisation, including front office and compliance are clear on their respective responsibilities with regards to surveillance –underpinned by policies and procedures that clearly delineate the interaction boundaries.

For smaller firms, the emphasis should distinctly be on managing conflicts of interest, underpinned by unambiguous policies to ensure and evidence that front office staff have been provided with clear advice.

In conclusion, we find that an effective surveillance function can be best achieved from a holistic starting point. Addressing surveillance in a tactical manner will inevitably lead to a sub-optimal capability and governance in the long run.